Carl Icahn's Cure for Corporate America

November 17, 2005

By Gene G. Marcial Even as he frets over what he thinks is wrong with Corporate America, billionaire financier Carl Icahn looks surprisingly relaxed at his finely appointed offices on the 47th floor of the General Motors (GM) building in Manhattan.

"With some exceptions, the wrong people are running U.S. companies," complains the activist investor, whose most recent target is Time Warner (TWX), in which he has taken a stake and is threatening a proxy fight.

"It's been that way for years, and it hasn't gotten much better," he contends. "Many corporate chiefs, unfortunately, are not qualified to run their companies." But, Icahn notes, they are "not concerned about being ousted for weak performance, because there's no accountability."

"BLOATED BUREAUCRACIES." Icahn, who rarely gives interviews, says that there are no true board elections. Instead, "members of the boards are cronies appointed by the very CEOs they're supposed to be watching...They run companies the way totalitarian regimes run their governments," he claims. "They use the corporate treasury funds to keep themselves in power in the rare instances that they are challenged in a proxy fight."

Additionally, it's disingenuous to believe that chief executives are given incentives for working hard and doing a good job, says Icahn, because, amazingly, their rubber-stamp boards simply grant them more options at lower strike prices when the stock has declined. Either way, the CEO wins, whether the chief exec performs well or not.

"The result is, we have bloated bureaucracies in Corporate America," according to Icahn. U.S. companies, by and large, could easily cut costs by more than 30% and still operate profitably, he figures. "The root of the problem is the absence of real corporate democracy."

WINNING TRACK RECORD. Leon Black, another influential investor, who is a senior partner at Apollo Management, says Icahn "has a great nose for value, and knows all the tactics to get from here to there in realizing value." He is tenacious, very focused, and combative in negotiations -- "but keeps his eye on the ball in the endgame," Black adds.

Icahn's winners, notes Black, far outnumber and outweigh his losers. Icahn's investments in 56 companies, from 1996 through May, 2004, produced profits of $2.77 billion, or an annual rate of return of 53%, according to the Institutional Investor. He pocketed some $1.3 billion in profits from his fight to break up RJR Nabisco in the mid-1990s.

Icahn owns sizable stakes and plays an activist role in such companies as Kerr-McGee (KMG), in which he has a 6.8% holding; Blockbuster (BBI), with 10%; Fairmont Hotels & Resorts (FHR), 9%; and financial-services company BKF Capital (BKF), 16%.

PHILOSOPHY PAYS OFF. Apart from RJR Nabisco, Icahn's big winners -- according to a study by the Institutional Investor -- include ImClone Systems (IMCL), in which he invested $196.4 million and produced a profit of $417 million; Revlon (REV), where his $196.8 million investment turned in a gain of $281.2 million; and Samsonite (SAMC), where he achieved a gain of $103.6 million on an investment of $34.1 million.

Among Icahn's big losers: Beazer Homes (BZH), which resulted in a loss of $38 million on an investment of $70 million; Xerox (XRX), where his $32 million investment ended in a loss of $21.2 million; and Titan, which dealt a loss of $14.7 million on a $21.8 million investment.

For someone who started out as a stockbroker at Dreyfus, with just $500 in his pocket and a philosophy degree from Princeton University, Wall Street was, indeed, paved with gold: Icahn is worth $8.5 billion today, according to Forbes' most recent list of billionaires. He remains loyal to friends -- even those with whom he started out at Dreyfus, when he was a mere trainee.

SOLID-GOLD MEMORY. One such friend is Robert Berlin, now a broker at Wachovia (WB). "Carl doesn't forget old friends," Berlin says. "No matter how busy he is, he takes my calls -- and sometimes throws some business my way."

Nor does Icahn forget those he thinks are running things the wrong way, which is why Time Warner has a fight on its hands.

Marcial, a senior writer for BusinessWeek, is the "Inside Wall Street" columnist